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4 Things to Watch When Pandora Media Inc. Reports Earnings

Will the music streaming specialist disappoint again? That depends on these four things.

Do you hear that, Pandora Media(NYSE:P) investors? It's the sound of your favorite music streaming specialist getting ready to report first-quarter results this Thursday. Here are four things I'll be listening for when Pandora's report hits the wires.

Are local ads and mobile building momentum?Last quarter local ad sales climbed 90% year over year to $49.9 million, but still only represented less than 20% of Pandora's total revenue. And it's easy to understand why local advertisers might favor Pandora over terrestrial radio: Its digital platform not only offers more direct ways for listeners to interact, such as linking to websites for promotions, but also provides more accountability in terms of tracking the effectiveness of such ads. As a result, Pandora has continued to bolster its sales team to capitalize on what it largely views as low-hanging fruit. Investors rightly want to see whether those efforts are actually bearing that fruit.

Meanwhile, mobile revenue grew 43% last quarter to represent 78% of Pandora's total revenue, and management stated mobile monetization "reached record highs across all dimensions of Pandora's business." Again, I'd like to see Pandora at least sustain this rate of mobile growth, especially leading into the impending roll-out of its new programmatic buying solution for mobile advertisers. Listen for updates from Pandora CEO Brian McAndrews, who has stated this new advertising solution should hopefully become a meaningful contributor to Pandora's growth by the end of this year.

Growth in (and loyalty of) active listenersNext, all eyes will turn to Pandora's growth in active listeners, which increased roughly 7% year over year to 81.5 million at the end of 2014. Pandora has repeatedly insisted it can grow to at least 100 million users in the U.S. over the long term, helped by the increasing penetration of Internet-connected devices.

But even more important to gauging Pandora's success, says McAndrews, is the loyalty of those listeners. As evidence of this, look first for total listener hours -- which grew 15% year over year last quarter to 5.2 billion -- to continue to outpace the growth in active listeners. Pandora will also likely offer metrics on total hours per active listener (up 7% last quarter to 22 hours per month), as well as details on its share of U.S. radio listening (which had climbed 1.1 percentage points to 9.7% as of the end of 2014).

Was guidance conservative?Next, in February Pandora also underwhelmed Wall Street with its guidance, calling for first-quarter revenue of $220 million to $225 million, with adjusted EBITDA expected to be a loss in the range of $35 million to $30 million. As of this writing, analysts will be looking for a loss of $0.17 per share on sales at the high end of Pandora's expected range. If Pandora doesn't exceed its own expectations, we could be looking at another letdown in the eyes of analysts.

Curiously, though, the same analysts are also estimating full-year revenue of $1.16 billion, or smack dab in the middle of Pandora's own expected range of $1.15 billion to $1.17 billion. Either way, it'll be interesting to see whether Pandora was simply under-promising on guidance with the intent of overdelivering.

Updates on Web IV royalty ratesFinally, as we approached last quarter's report, I wanted to hear any updates management had with regard to the ongoing "Web IV" royalty rate-selling proceeding commenced in early 2014 by the U.S. Copyright Royalty Board. But I was disappointed when no significant updates were offered during the subsequent conference call.

Coincidentally, a little over two weeks later, Pandora issued a press release linking to its comprehensive written rebuttal statements filed with the CRB. In them, Pandora outlined its arguments against a rival proposal for drastically increased rates from royalty collector SoundExchange. In short -- and this is a massive oversimplification of the 216-page document -- Pandora continues to insist SoundExchange's proposal is unsustainable and, if implemented, would ultimately require a drastic reduction in the number of hours of exposure to right holders' music. That would be bad not only for the right holders, but also for Pandora as it would be offering a less-diverse set of music to the ears its aforementioned loyal listeners.

That said, Pandora management also made it clear they have no problem signing more direct deals with labels that show a willingness to come to more amiable terms. In fact, so far Pandora has already signed deals with music rights giants Merlin and BMG, and most recently announced a new licensing deal in February with classical music leader Naxos.

In any case, with closing arguments for Web IV set for early June and a final determination expected by the end of 2015, it seems fair to expect Pandora will continue to pursue more direct deals to reduce the risk of an adverse ruling. Listen closely, then, for any hints from management later this week on how those proceedings are progressing.

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